Sensitivity analysis: a) looks at the most reasonably optimistic and pessimistic

Question

Sensitivity analysis: a) looks at the most reasonably optimistic and pessimistic results for a project. b) helps identify the variable within a project that presents the greatest forecasting risk. c) is used for projects that cannot be analyzed by scenario analysis because the cash flows are unconventional. c) is generally conducted prior to scenario analysis just to determine if the range of potential outcomes is acceptable. d) illustrates how an increase in operating cash flow caused by changing both the revenue and the costs simultaneously will change the net present value for a project.

Explanation / Answer

b) helps identify the variable within a project that presents the greatest forecasting risk

since in sensitivity analysis we predict the outcome of a decision if situations turns out to be different from planned outcome.Sensitivity analysis shows how different values of an independent variable will impact a particular dependent variable under a given set of assumptions.

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